BANK BRADESCO current report, Q1 FY2013

Business Context and Reporting Period

Company: Banco Bradesco S.A. (Bank Bradesco)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2012 (Consolidated Financial Statements)
Filing Date: March 28, 2013
Accounting Standards: International Financial Reporting Standards (IFRS)
Business Overview: Bradesco operates primarily in two segments: Banking (retail, corporate, investment banking, leasing) and Insurance (auto, health, life, pension plans). The organization is headquartered in Osasco, Brazil, and is listed on the NYSE and BM&FBOVESPA.

Key Financial Metrics (Year Ended Dec 31, 2012)

Metric (R$ thousand) 2012 2011
Net Interest Income 43,492,965 35,611,286
Net Fee and Commission Income 12,804,795 10,834,333
Net Income (Total) 11,351,694 11,089,442
Net Income (Controlling Shareholders) 11,291,570 10,958,054
Basic EPS (Ordinary) R$ 2.83 R$ 2.74
Basic EPS (Preferred) R$ 3.12 R$ 3.01
Total Assets 801,186,699 722,086,892
Total Liabilities 729,840,309 662,704,798
Total Equity 71,346,390 59,382,094
Net Cash from Operating Activities 51,612,398 (37,060,630)
Loans and Advances to Customers (Net) 269,652,428 245,874,949
Impairment of Loans and Advances (11,510,179) (8,296,151)

Material Changes vs. Prior Period

  • Revenue Growth: Net interest income increased by 22.1% (R$ 7.88 billion) and net fee income rose by 18.2% (R$ 1.97 billion) compared to 2011.
  • Profitability: Net income attributable to controlling shareholders increased by 3.0% to R$ 11.29 billion.
  • Asset Expansion: Total assets grew by 10.9% to R$ 801.2 billion, driven by a 9.9% increase in the loan portfolio to customers.
  • Impairment Costs: Provisions for loan impairment increased by 38.7% to R$ 11.51 billion, reflecting higher credit risk exposure.
  • Cash Flow: Operating cash flow turned significantly positive (R$ 51.6 billion) compared to a negative R$ 37.1 billion in 2011, largely due to changes in compulsory deposits and insurance technical provisions.
  • Capital Adequacy: The Capital Adequacy Ratio for the Consolidated Economic and Financial group stood at 16.14%, well above the regulatory minimum of 11%.

Guidance, Outlook, Risks, and Unusual Items

  • Subsequent Event (Capital Increase): On March 11, 2013, the Special General Meeting approved a capital increase of R$ 8 billion via a 10% bonus share issuance, raising share capital to R$ 38.1 billion.
  • Acquisitions: In 2012, Bradesco acquired the remaining stake in Banco do Estado do Rio de Janeiro (BERJ) for R$ 50.6 million, achieving 100% ownership. The 2011 acquisition of BERJ resulted in a bargain purchase gain of R$ 406 million recognized in 2011.
  • Risk Management:
    • Credit Risk: Maximum credit risk exposure increased 11.2% to R$ 943.9 billion. Impaired loans represented 10.0% of the total customer loan portfolio.
    • Market Risk: Value at Risk (VaR) for the trading portfolio increased to R$ 200.3 million at year-end 2012, primarily due to higher exposure to fixed-rate and price index instruments.
    • Liquidity Risk: The organization maintains a Minimum Liquidity Reserve (RML) and monitors cash flow mismatches daily.
  • Contingencies: Significant tax and social security litigation exists, including disputes over Cofins (R$ 7.86 billion), INSS on autonomous brokers (R$ 1.14 billion), and loan loss deductibility (R$ 798 million). Management believes provisions are sufficient.
  • Unusual Items: The 2012 income statement included a gain of R$ 793 million from the sale of Serasa shares. Additionally, R$ 1.17 billion in impairment losses were recognized on available-for-sale assets.

Investor Verification Checklist

  • Loan Quality: Verify the trend in the impairment provision ratio (3.9% of gross loans in 2012 vs. 3.3% in 2011) and the composition of the impaired portfolio (10% of total loans).
  • Capital Adequacy: Confirm the Capital Adequacy Ratio of 16.14% against the 11% regulatory requirement and the margin of R$ 30.9 billion.
  • Dividend Policy: Review the distribution of R$ 3.89 billion in dividends and interest on equity in 2012 and the impact of the subsequent 10% bonus share issuance.
  • Tax Litigation: Assess the potential impact of ongoing tax disputes totaling over R$ 10 billion on future cash flows.
  • Market Risk Exposure: Analyze the increase in VaR and sensitivity to interest rate and exchange rate fluctuations, particularly regarding the trading portfolio.
  • Insurance Reserves: Review the adequacy of technical provisions for insurance and pension plans, which totaled R$ 118.8 billion.